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Twin Deficits: An Alternative Framework from General Equilibrium Perspective with U.S. Results

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  • Tuck Cheong Tang

Abstract

This study proposes an alternative theoretical framework for testing twin deficits hypothesis from the general equilibrium perspective (income-expenditure equilibrium) that takes both the behavioural variables - saving and investment into consideration. Empirically, the cointegration tests show U.S. fiscal balance, current account balance, real GDP and interest rates (short- and long-run) are co-moved over the periods 1970Q2 - 2011Q4. The real income and interest rates from the saving and investment channels, are important variables in explaining the U.S. current account deficit. The empirical results validate the twin deficits hypothesis in U.S. Some policy implications have been drawn – “fiscal cliff”. This study also suggests the profolio balance approach from the general equilibrium perspective for future twin deficits analysis.

Suggested Citation

  • Tuck Cheong Tang, 2013. "Twin Deficits: An Alternative Framework from General Equilibrium Perspective with U.S. Results," Monash Economics Working Papers 41-13, Monash University, Department of Economics.
    • Handle: RePEc:mos:moswps:2013-41
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    File URL: http://www.buseco.monash.edu.au/eco/research/papers/2013/index.html
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    Cited by:

    1. Ergin Akalpler & Yohanna Panshak, 2019. "Dynamic relationship between budget deficit and current account deficit in the light of Nigerian empirical application," Evolutionary and Institutional Economics Review, Springer, vol. 16(1), pages 159-179, June.
    2. Bernardin Senadza & Godson Korbla Aloryito, 2016. "The twin deficits hypothesis: Evidence from Ghana," International Journal of Business and Economic Sciences Applied Research (IJBESAR), International Hellenic University (IHU), Kavala Campus, Greece (formerly Eastern Macedonia and Thrace Institute of Technology - EMaTTech), vol. 9(3), pages 55-62, December.

    More about this item

    Keywords

    Budget deficit; Current account balance; General equilibrium perspective; U.S.;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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